Inflation. It is the dreaded word that our parents used to grumble about whenever the receipt at the supermarket was handed to them, or as they pored over the bills. The word has always inspired a dreaded word, but what exactly is inflation? More importantly, how does inflation affect our lives? Look below for a crash course in inflation and what you can do to avoid becoming financially destitute because of rising prices.
What Is Inflation?
In the most basic terms, inflation refers to when money loses some of its value. If you have ever had a parent or grandparent recall about how much a dollar once got them and compared that to today…yup that dollar bill more certainly does not stretch that far these days. As a matter of fact, a dollar won’t even cover the cost of a soda at your nearest vending machine now. Over time cost of goods rises and when that happens currency begins to lose its value.
Two Kinds of Inflation
To get a little more into the nitty-gritty, there are technically two types of inflation: demand-pull and cost-push.
With demand-pull inflation, we’re talking about when services and goods rise faster than our economy’s production power. So those times maybe when you have noticed a lag in service or creation of a product might just have something to do with demand-pull inflation. In other words, the demand is higher than the ability to produce the product or service. When this happens, companies will typically raise prices in order to either hire more staff to meet production or service needs or a company will raise prices in order to pay their current employees more in order to work more.
Cost-push inflation, on the other hand, happens when there is a quick wage increase, or more often, a growing price of raw materials. In other words, the cost of materials goes up, so companies raise their prices in order to offset the growing price of production.
It is easy to see where the two types of inflation end up turning into a vicious cycle. If most companies are raising their prices due to the cost of goods becoming higher (cost-push inflation) often this will cause demand-pull inflation because those prices and demands will grow fast than producers can keep up with, thus forcing them to raises costs in order to speed up production or services.
The Speed of Inflation
Believe it or not, the economy is constantly dealing with various rates of inflation. What determines whether that inflation rate hits the news headlines, or our wallets, however, is how quickly those costs begin climbing. The quicker the cost climb, the more severely inflation will be felt in our lives.
There are actually several different speeds to inflation that appear in our everyday economy. The speed of inflation can have a direct impact on our financial lives. Here are the top four:
Creeping inflation is also known as “mild inflation.” It earned its moniker because of its slow growth. Technically, creeping inflation is when there is a 3% or less rise in costs per year. Creeping inflation is actually considered the ideal type of inflation according to most economists because the subtle rise in prices is not so large that the general public is struggling to keep up with it, while at the same time the small growth in percentage rate is considered just enough for consumers to actually buy more because of fear of that percentage rising. In other words, most people are going to try to get products while they are cheaper and this essentially drives the creeping inflation.
Walking inflation is when the inflation percentage ranges between 3%-10%. This percentage is considered dangerous to the economy and definitely spiders out into our everyday lives much more quickly. Walking inflation is said to happen when individuals buy more than they actually need. This often happens in anticipation of higher prices. Remember the great toilet paper shortage at the beginning of the pandemic? Some people panic-purchased massive amounts of toilet tissue and other goods giving into what we commonly refer to as “hoarding.” However, this hoarding pushes the demand for a product or service to a point that suppliers are having a difficult time keeping up. In turn, essential goods have their prices raised to the point that most of us would struggle to afford them.
Galloping Inflation is when things can get pretty dicey in an economy. Galloping inflation rises to over 10% and in this case, neither business nor wages can keep pace with the rise of costs. What makes this inflation extra dangerous is the fact that outside investors generally avoid countries that have an inflation rate of 10% or more. Once foreign investors abandon a country in this situation, this effectively strips that country of a much-needed influx of money.
Hyperinflation occurs when the inflation rate rises to a staggering 50% per month. This thankfully rarely happens. Hyperinflation typically happens during war times. The last time the United States had to deal with Hyperinflation was during the Civil War.
How Inflation Can Affect Our Everyday Lives
How inflation affects a person’s life largely depends on what their current economical and financial status is. For most of us, we see inflation in the everyday essentials: it starts costing a little more to fill up our gas tanks, our grocery bill grows even though we may have cut down on how much we are buying. Not only does inflation affect our shopping habits but it also affects our wages. Depending on what kind of company we are working for, an imbalanced supply and demand chain can mean that we are working a lot more for way less.
Like most things in life, inflation in moderation is good for our economy. While inflation is something nearly always present within our economy, depending on its speed and severity it can greatly affect our overall lives.